August 19 , 2003
Robert Corn-Revere, Esq.
Davis Wright Tremaine LLP
1500 K Street, N.W.
Washington, DC 20005-1272
Dear Mr. Corn-Revere:
This letter responds to your request on behalf of the Stonebridge Life Insurance Company ("Stonebridge") for an advisory opinion concerning the applicability of the Telemarketing Sales Rule ("TSR"), 16 C.F.R. Part 310, to third-party telemarketing companies hired by Stonebridge to sell its insurance products. Stonebridge asks that the Commission clarify that the TSR does not apply to the telemarketing of insurance products by third-party telemarketers because the activity is exempted by the McCarran-Ferguson Act, 15 U.S.C. §1012(b).(1) The McCarran-Ferguson Act states that "the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by state law." Stonebridge asserts that all of its insurance activities, including its marketing practices and its telemarketing scripts, are actively regulated by state authorities in each state where it sells.
The Telemarketing and Consumer Fraud and Abuse Prevention Act ("Telemarketing Act"), 15 U.S.C. §§ 6101-6108, under which the TSR was promulgated, states that "[N]o activity which is outside the jurisdiction of [the FTC] Act shall be affected by this Act."(2) Thus, the TSR is subject to the same jurisdictional limitations as the FTC Act.
There are two types of exemptions from the FTC Act (and consequently the TSR). The first type is based on the status of the entity under consideration, and the second type is based on the activity in question. Status-based exemptions are defined in terms of the nature of the entity itself. The FTC Act (and thus the TSR) does not apply to specific types of entities, such as banks, credit unions, and certain non-profit organizations, based solely on their status. However, when such an entity hires a third party to telemarket on its behalf, the telemarketer is not shielded from Commission review by the exempt status of its client unless it is itself a bank or other exempt entity.(3)
A different analysis is necessary, however, to determine whether an activity is exempt from coverage of the FTC Act (and the TSR) by operation of the McCarran-Ferguson Act. The McCarran-Ferguson Act does not exempt insurance companies from the FTC's jurisdiction, but rather exempts only those activities that constitute "the business of insurance," regardless of who performs them, and then only to the extent that such activities are regulated by state law. In contrast to the analysis to determine whether a "status-based" exemption might apply, analysis of whether an "activity-based" exemption might apply starts with an inquiry into the activity, not the status of the entity engaged in the activity. For example, a telemarketing campaign that constitutes "the business of insurance" under state law, and is regulated by state law, is outside the coverage of the TSR, regardless of whether the telemarketing is conducted by an insurance company's own employees or by a third-party telemarketer.
The Supreme Court has explained that, under the McCarran-Ferguson Act, a three-part factual inquiry is necessary to evaluate whether any particular activity constitutes the business of insurance. See Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119, 129 (1982). First, does the activity have the effect of transferring or spreading a policyholder's risk; second, is the activity an integral part of the policy relationship between the insurer and the insured; and third, is the practice limited to entities within the insurance industry. Id. This inquiry requires a factual analysis of the activities in question.
Even if an activity meets the three elements of the test and therefore constitutes the business of insurance, there is a further question that must be answered: is the activity at issue subject to state regulation. To answer this question, it is necessary to determine not only whether the activity is "regulated by state law," but also whether the state regulation was enacted for the purpose of regulating the "business of insurance." See Autry v. Northwest Premium Services, Inc., 144 F.3d 1037, 1043 (7th Cir. 1998). Where the interstate sale of insurance is involved, it is necessary to ascertain not only whether the practice in question is regulated by the states in which the practice has its impact (see FTC v. Travelers Health Ass'n, 362 U.S. 293, 298-99 (1960)), but also whether such states are able to exert local control "through [their] own provisions, instrumentalities, and processes." Travelers Health Ass'n v. FTC, 298 F.2d 820, 823 (8th Cir. 1962). All of these questions must be answered in the context of a specific factual setting.
The Commission may assert jurisdiction over the telemarketing of insurance products only if the telemarketing activity fails the Pireno test and/or fails the state regulation test. If the telemarketing activity passes those tests, the activity is exempt from the TSR. Whether the telemarketing is done by third-party call centers or by an insurance company is not determinative. The decisive issues are whether the activity constitutes "the business of insurance" and whether it is regulated by state law.
Your request for an advisory opinion did not include a specific fact situation, but rather asked generally whether the Rule would apply to third-party telemarketers hired by Stonebridge to sell its insurance products. Since your request does not supply sufficient information for us to make a determination of the Rule's applicability to these third-party telemarketers, we have detailed the analysis that would be applied in making such a determination. In order to make a specific determination of the Rule's applicability to Stonebridge's telemarketing, the Commission would need additional information, including, but not limited to, the nature of the product offered, the state(s) in which it is sold, and the extent of state regulation in those states.
By direction of the Commission.
Shira Pavis Minton
1. Stonebridge raised this question in Stonebridge Life Insurance Co. v. FTC, No. CA 03-739 (D.D.C., filed Mar. 21, 2003), in which it sought a declaratory ruling that such third-party calls are exempt from the Rule because they constitute "the business of insurance."
2. 15 U.S.C. 6105(a).
3. See 60 Fed. Reg. 43842, 43843 (Aug. 23, 1995); 68 Fed. Reg. 4580, 4587 (Jan. 29, 2003).